Selling a Rental Property in Connecticut: Taxes & 1031
Quick answer: When you sell a rental property, you owe tax on your gain, and the depreciation you took, or could have taken, is taxed at up to 25% as "recapture." The rest of the gain is taxed at the long-term capital gains rate, and high earners may also owe a 3.8% investment income tax. A 1031 exchange can defer the tax if you roll the proceeds into another investment property on a strict timeline. Connecticut taxes the gain as ordinary income. Florida has no state income tax.
How the gain is calculated
Start with the sale price and subtract your selling costs, such as commission, conveyance tax and attorney fees. Then subtract your adjusted basis: what you paid, plus the cost of capital improvements, minus the depreciation you claimed. The result is your taxable gain.
Because depreciation lowers your basis every year, a property you have owned and depreciated for years usually has a bigger gain than the price difference suggests.
Depreciation recapture
Residential rental property is depreciated over 27.5 years. When you sell, the part of your gain that equals the depreciation you took is "unrecaptured Section 1250 gain," taxed at a maximum federal rate of 25%. It is a ceiling, so if your ordinary rate is lower, the lower rate applies. The IRS treats depreciation as allowed or allowable, so skipping it on your returns does not avoid recapture.
Capital gains and the investment income tax
The rest of the gain, the appreciation above your original basis, is a long-term capital gain if you owned the property more than a year, taxed federally at 0%, 15% or 20% depending on income. On top of that, the 3.8% net investment income tax applies when modified adjusted gross income is above $200,000 for single filers or $250,000 for joint filers.
Connecticut treats capital gains as ordinary income at rates up to 6.99%. Florida has no state income tax, which changes the math for Florida properties.
Example: selling a rental for $400,000
This is an illustration, not tax advice. Assume you bought a rental for $250,000, took $60,000 of depreciation over about seven years, and sell for $400,000 with $20,000 in selling costs. Your adjusted basis is $190,000, so your gain is $190,000.
Piece of the gain | Amount | Federal rate (example; 25% is a maximum) | Estimated federal tax |
|---|---|---|---|
Depreciation recapture | $60,000 | 25% cap | $15,000 |
Remaining long-term gain | $130,000 | 15% | $19,500 |
Total | $190,000 | $34,500 |
That excludes the 3.8% investment income tax if it applies and Connecticut income tax. Your numbers will differ, which is why the calculation belongs with your CPA before you list, not after you have a contract.
The 1031 exchange
A 1031 exchange lets you defer federal capital gains tax and recapture by reinvesting the proceeds from an investment property into another like-kind investment property. It does not apply to your primary home. The rules are strict:
You must use a qualified intermediary. You cannot take possession of the sale proceeds.
You have 45 days from closing to identify replacement properties.
You must close on the replacement within 180 days, or by your tax return due date including extensions if that comes first.
Cash or debt relief you receive, called "boot," is taxable.
Line up the intermediary before you close, not after. Missing a deadline ends the exchange and the tax comes due.
Selling with tenants in place
The lease survives the sale, which shapes who will buy and how showings work. See selling a house with tenants in it. If you are weighing whether to sell at all, sell it, or rent it out? runs the arithmetic on both sides, and capital gains tax on selling your home covers the different rules for a primary residence.
How we help with a rental sale
Zack and Nick DeCaro own, renovate and lease rental properties, so they look at a rental the way a buyer-investor does: rents, expenses, condition and exit. We price it from comparable sales and rent comps, coordinate timing with your attorney and your intermediary, and run the net-to-seller before you decide. Our flip math guide shows how investors really calculate what they can pay.
Questions landlords ask
Do I pay tax on a rental property sale if I lose money?
If you sell for less than your adjusted basis, you have a loss rather than a gain. How that loss is treated depends on your situation, so check with your CPA.
Can I do a 1031 exchange into a Florida property?
Yes. Like-kind refers to the type of property, not the state, so investment real estate in Connecticut can be exchanged for investment real estate in Florida.
Can I avoid recapture?
A properly structured 1031 exchange defers it. Selling outright does not avoid it.
If you are thinking about selling a rental, request a home value and a net-to-seller estimate before you make the tax decision.
This is general information, not legal, tax or financial advice. Tax rates, thresholds and rules change and depend on your situation; consult a CPA or tax attorney before selling or starting an exchange. Savings and tax figures are illustrations only.
Sources: IRS Topic No. 409: Capital gains and losses; IRS Publication 544: Sales and Other Dispositions of Assets; IRS: Questions and Answers on the Net Investment Income Tax; IRS Fact Sheet FS-2008-18: Like-Kind Exchanges Under IRC Section 1031; Connecticut Department of Revenue Services (income tax rates).
